ECB says public spending should be cut

A number of EU governments could slash their spending by more than a quarter and still provide top-quality public services, said a senior official at the European Central Bank, in what could be viewed as an incursion into member states’ fiscal policy.

Cutting public spending from the current average of 47.6% of GDP to 30-35% could boost competitiveness in Europe while still enabling countries to provide high-quality public services, according to European Central Bank executive board member Juergen Stark. 

While he conceded that his remarks could be interpreted as “political interference” rather than “helpful advice”, he stressed the importance of public-sector efficiency for economic growth and fiscal sustainability. 

“If Europe wants to be dynamic and competitive in the 21st century, then it needs a well-functioning market economy that is able to adapt quickly to change. But it is not clear that we can have such an economy while the state continues to absorb almost half of the economy’s resources,” he said. 

Public spending in France and Belgium represented more than 50% of GDP in 2005. In Ireland the figure was just 34%, similarly to US levels. 

Lowering public expenditure would enable governments to cut taxes, thereby attracting more investment and resulting in a more motivated and dynamic work force, said Stark. 

His calculations of an ‘ideal’ budget were based on how much money countries judged to be both “good performers” and “low spenders” in a sector (such as infrastructure, education and social services) spend on these objectives. 

For example, Japan, he said, was the best performer in education although it was among the countries that spent the least. The Netherlands and the UK also did well, “despite spending only around 5% of GDP, compared to 7 or 8% in higher-spending countries”. 

As regards countries’ redistributive policies, he pointed out that Japan and Norway had achieved similar results to Denmark, Finland and Sweden, in creating a more equal income distribution, despite spending significantly less on social transfers. 

Nevertheless, although they devote between 50-56% of GDP on public spending, Sweden, Denmark and Finland rank in the top four most competitive countries, just behind Switzerland, according to the World Economic Forum’s annual Global Competitiveness Report (EURACTIV 27/09/06). 

Stark’s comments could spur controversy in France, where the ECB has become a target of criticism in the campaign for next month’s presidential elections, with candidates accusing it of imposing an inflationary policy that restricts economic growth and of lecturing governments on issues outside of its competences, such as their wage policies. 

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